What Happens When You Show Them the Money? Lump Sum Distributions, Retirement Income Security, and Public Policy

Leonard E. Burman,
Leonard E. Burman Institute Fellow - The Urban Institute, Co-founder - Urban-Brookings Tax Policy Center
Norma B. Coe, and William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

January 3, 2001

We examine pre-retirement lump sum distributions from pension plans, which have grown significantly in recent years. Most LSD recipients do not rollover the funds into qualified accounts, but the likelihood of rollover rises for larger distributions. We find that tax penalties imposed in 1986 on non-rollovers by people younger than 55 raised the likelihood of rollovers among this group, but had less effect on the likelihood that such households saved the funds, where saving includes investing in taxable assets and paying off debt. Simple calculations indicate that cash-outs reduce annual retirement income by $1,000 to $3,000. These calculations almost surely overstate the pension loss. Nevertheless, pension loss may be quite important among the affected households, who are likely to have accumulated less retirement wealth than average.